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FORTUNE.COM // APR.1.
SPOTIF Y ’S
PODCAST PLAY
MEDIA
MERGERS
SPOTIFY’S $340 million
purchase of two pod-
casting companies,
Gimlet Media and
Anchor, is not just an
attempt to dominate
every facet of your
audio experience. It’s
also about making the
company profitable
(finally).
Music, the main
reason users shell
out $9.99 a month for
a premium Spotify
account, is largely
controlled by record
labels. That means
royalties must be paid
every time you play
Lady Gaga or Cardi
B, an impediment to
Spotify’s becoming a
profitable company
despite its 200 million
global users.
Becoming its own
record label isn’t a
workable solution,
as Spotify would
risk losing the music
catalogs of huge art-
ists on other labels.
But if a user listens
to a Spotify-produced
podcast, the benefits
are twofold: less money
paid to licensing, and
an opportunity for
advertising revenue.
Simply put, Spotify
wants you to listen to
less music.
—ARIC JENKINSKraft Heinz:
A Cautionary Tale
Cost cutting didn’t help Jell-O and wieners
in an avocado-toast world. By Shawn Tully
THE SHARES AND REPUTATION of Kraft
Heinz took a huge hit when the world’s
fifth-largest food company announced a $15.4 bil-
lion write-down on Feb. 21. It broadcast the failure
of a brutal cost-cutting campaign, pioneered by
one of its biggest shareholders, Brazilian investor
3G Capital. Wall Street had initially praised 3G’s
moves, but what was advertised as the cure has now
cost the ketchup-maker a lot of blood.
Here are the three ways a maniacal focus on costs
savaged a storied name.
to discount the likes of
Kraft cheese slices.
FALLING MARGINS
∫ From 2015 through
2018, Kraft Heinz
lowered its adjusted
non-production-related
costs from 10% to 8%
of sales, the payoff from
its once-vaunted cost
management effort.
But gross margins
dropped even more, by
3.5 percentage points—
overwhelming the
progress on overhead.
Despite efforts to
preserve pricing, Kraft
Heinz suffered shrinkage
in margins, as private-
label brands from Costco
and Kroger squeezed
its profits on such
signature products as
Oscar Mayer hot dogs. In
a TV interview following
February’s bombshell,
Warren Buffett, whose
Berkshire Hathaway
owns 27% of Kraft Heinz,
acknowledged “a weaker
bargaining hand” that
rendered Kraft Heinz “not
as strong as we thought.”A FAILED STRATEGY
∫ By the middle of 2016,
when Wall Street was
touting the genius of 3G,
Kraft Heinz’s stock was
trading at a premium to
book value of $50 billion.
Today its valuation is
$28 billion below the
equity dollars invested by
its owners, including the
$15.4 billion write-down.
In effect, investors are
predicting that Kraft
Heinz will earn about
one-third less in the years
ahead than the company
forecast a few months
ago. Reviving aging
brands like Kool-Aid or
Kraft Mac & Cheese in a
world where millennials
demand healthy choices
will be one of business’s
toughest challenges.REVENUES WENT
NOWHERE
∫ From the close of
2016 to the end of
last year, Kraft Heinz
revenues fell by almost
$229 million, or 1%, to
just over $26 billion. The
company skimped on
the marketing dollars
needed to support its
brands and further
antagonized retailers by
resisting their demands^